New to procurement? Start here.

What procurement does

Procurement (also called purchasing) makes sure a company gets the goods and services it needs – at the right price, in the right quality, at the right time and with acceptable risk. That sounds simple, but in a manufacturing company purchased materials and services often account for more than half of revenue. Every euro saved in purchasing increases profit by exactly one euro, while the same effect through sales would require several euros of additional revenue.

Procurement has two sides:

Together, both are called Source-to-Pay, also written Source2Pay or S2P.

Direct and indirect procurement

• Direct procurement buys everything that ends up in the product: raw materials, components, packaging. It is business-critical, because a missing part can stop production. Typical topics: long-term supplier relationships, quality, cost breakdowns, supply security.
• Indirect procurement buys everything the company needs to operate: IT, marketing, facility services, travel, consulting, office supplies, maintenance (MRO). It has many small orders and many internal customers. Typical topics: simple ordering, compliance, catalogues, bundling.

The Source2Pay cycle

Strategic and operational procurement form one closed cycle: the contract from source-to-contract becomes the basis for every order in procure-to-pay, and the invoice and order data flow back into the next spend analysis. Click on a step to see the key question, who is involved and which tools are typical.

The source-to-pay process in eight steps

1. Spend analysis – Where does our money go, to which suppliers, in which categories? → Spend Analytics
2. Category strategy – How do we buy each category (e.g. "electronic components")? → Category Management
3. Supplier management – Which suppliers are qualified, how do they perform, what are the risks? → Supplier Relationship Management
4. Sourcing – Requesting quotes (RFI, RFQ), comparing them, negotiating, awarding. → eSourcing
5. Contracting – Fixing the result in a contract and tracking obligations. → Contract Management
6. Requisition and ordering – Employees request what they need, it is approved and ordered. → eProcurement
7. Delivery – Order confirmation, delivery dates, goods receipt. → Supply Chain Collaboration
8. Invoice and payment – Checking the invoice against order and receipt, paying on time. → Accounts Payable

Key figures every buyer should know

KPI	What it measures	Why it matters
Savings	Price reduction compared with a baseline (last price, budget or market)	The classic performance measure of procurement
Spend under management	Share of spend that procurement actively manages	Shows the influence of procurement in the company
Maverick spend	Purchases that bypass agreed suppliers or processes	Leads to higher prices and risks
Purchase price variance (PPV)	Difference between planned and actual purchase price	Important in direct procurement and for controlling
Supplier on-time delivery (OTD)	Share of deliveries on the confirmed date	Central for production and service levels
Cycle time (request to order)	Time from purchase request to order	Measures the efficiency of operational procurement
Touchless invoice rate	Share of invoices processed without manual work	Measures automation in accounts payable
Days payable outstanding (DPO)	Average time until suppliers are paid	Important for cash flow and supplier relations

Regulations procurement needs to know in 2026

• E-invoicing: in Germany, companies must be able to receive structured e-invoices since 2025 and issue them from 2027/2028. EU-wide rules for cross-border trade (ViDA) follow from 2030.
• CBAM: since 2026, importers of steel, aluminium, cement, fertilisers, hydrogen and electricity from outside the EU pay for the embedded CO₂ (small importers below 50 tonnes per year are exempt).
• Supply chain due diligence: the German Supply Chain Act (LkSG) requires large companies to manage human rights and environmental risks with their suppliers; it is currently being simplified. The EU directive (CSDDD) is to apply from July 2029.
• Product carbon footprint: more and more customers ask for the CO₂ footprint of purchased parts, which procurement has to obtain from suppliers.

Glossary

Auction (eAuction) – Online negotiation in which suppliers bid against each other in real time under defined rules.

Bill of materials (BOM) – List of all parts and materials needed to make a product; the basis of direct procurement.

Catalogue (eCatalogue, punch-out) – Electronic product range of a supplier from which employees order. Punch-out means jumping to the supplier's web shop and returning the basket.

Category – Group of similar goods or services (e.g. "IT hardware", "plastic parts") for which a common strategy is defined.

Cost breakdown / should costing – Calculation of what a part should cost based on material, machine time, labour and overheads; the basis for fact-based negotiations.

EDI – Electronic data interchange; automatic exchange of orders and invoices between the IT systems of customer and supplier.

ERP – Enterprise resource planning system such as SAP S/4HANA or Microsoft Dynamics; holds orders, stock, invoices and financial data.

Framework agreement – Contract that fixes prices and conditions for a period; individual orders are then placed against it.

Incoterms – International rules that define who pays for transport and insurance and when risk passes to the buyer.

Intake – The front door of procurement: where employees describe what they need before it becomes a purchase request.

Kraljic matrix – Classic model that sorts categories into non-critical, leverage, bottleneck and strategic items to choose the right strategy.

MRO – Maintenance, repair and operations: spare parts, tools and consumables for production.

Purchase order (PO) – The binding order sent to a supplier.

Purchase requisition (PR) – The internal request to buy something; becomes a PO after approval.

RFI / RFP / RFQ – Request for information (who can deliver?), request for proposal (how would you solve it?) and request for quotation (at which price?).

Tail spend – The many small purchases that together make up a small share of spend but a large share of transactions.

TCO – Total cost of ownership: all costs over the life of a purchase, not just the price.

3-way match – Automatic check that order, goods receipt and invoice match before an invoice is paid.

AI agent – Software based on large language models that carries out a complete task on its own (e.g. sending RFQs and comparing quotes) within rules set by the buyer.

Where to go next

• Read the overview of all procurement processes.
• See who offers which software in the market landscape.
• Browse the frequently asked questions.